CLIENT UPDATE

2016 MAY
DISPUTE RESOLUTION

Resolving Ambiguity in Contracts

Introduction
Disputes about the meaning of contracts are often one of the largest sources of contractual litigation. In
Hewlett-Packard Singapore (Sales) Pte Ltd v Chin Shu Hwa Corinna [2016] 2 SLR 1083, the Court of
Appeal made a number of important observations in relation to the nature of contractual ambiguity in
general and the contra proferentem rule in particular. As observed by the Court of Appeal in the case,
“[w]hilst the actual facts of the present appeal are deceptively simple, they belie difficulties of
application”.

At the first instance, the High Court found that the relevant terms of the Respondent’s sales incentive
compensation scheme were objectively ambiguous and thus construed the terms contra proferentem
against the Appellant. On appeal, the Court of Appeal overturned the first instance decision in its entirety,
holding that the relevant terms were not ambiguous and finding in favour of the Appellant.

The Appellant was successfully represented before the Court of Appeal by Gregory Vijayendran, Lester
Chua and Pradeep Nair of Rajah & Tann Singapore LLP.

Brief Facts
The Respondent was formerly employed as a “product sales specialist” in the Appellant company’s
NonStop Enterprise Division (“NED”). The NED sells fault-tolerant servers designed for businesses that
require continuous and undisrupted provision of their services. Under the Respondent’s incentive
compensation scheme, she was entitled to incentive compensation for procuring “new business” for the
Appellant. “New business” was defined in the implementation guidelines to the Respondent’s incentive
compensation scheme to include a “new end-user customer” and “new application and/or new area for
the existing end-user customer”.

During her employment, the Respondent helped to secure a contract with Network for Electronic
Transfers (Singapore) Pte Ltd (“NETS”). NETS had been using the Appellant’s servers, which it
purchased in 2001, to support its e-payment services. Sometime in 2010, NETS decided to replace the
Appellant’s servers and considered replacing the same with servers provided by one of the Appellant’s
competitors. Before the migration from the Appellant’s servers to the competitor’s servers was completed,
the Respondent and her team managed to persuade NETS (after wooing them more aggressively) to cease
the migration and to purchase new servers from the Appellant (the “NETS Contract”). The question
then arose whether the NETS Contract was considered “new business” for the purpose of the
Respondent’s incentive compensative scheme, entitling the Respondent to incentive compensation under
the same.

After procuring the NETS Contract, the Respondent submitted her internal claim form for the NETS
Contract to be endorsed and approved as “new business”. After considering her claim, the Appellant
concluded that the NETS contract did not qualify as “new business” under the Respondent’s incentive
compensation scheme and informed the Respondent accordingly.

The Respondent brought an action against the Appellant, claiming for outstanding incentive
compensation as a result of her efforts in securing the NETS Contract (the “NBM Claim”). The
Respondent also claimed that having been involuntarily terminated, her final incentive pay should have
been calculated based with reference to pro-rated targets instead of full-year targets (the “Pro-Rated
Quota Claim”).

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The High Court Ruling

At the first instance, the High Court held in favour of the Respondent on both the NBM Claim and the
Pro-Rated Quota Claim on an application of the contra proferentem rule. The contra proferentem rule is
a canon of construction that provides that where there is doubt about the meaning of a contract, the
words will be construed against the person who put them forward.

In respect of the NBM Claim, the High Court found that the definition of “new business” and specifically,
the definition of “new end-user customer” in the guidelines was objectively ambiguous. The High Court
found that it was unclear whether the parties intended “new end-user customer” to include a former
customer who had returned to purchase a NonStop product from the Appellant (i.e. a “win-back”
customer). The High Court thus construed the terms contra proferentem against the Appellant (which
had drafted the guidelines) and found that the term “new end-user customer” included “win-back”
customer.

On the facts, the High Court found that NETS was a “win-back” customer and thus a “new end-user
customer” when it signed the NETS Contract in March 2012. As such, the Respondent was entitled to the
incentive compensation for “new business” under her incentive compensation scheme.

In respect of the Pro-Rated Quota Claim, the High Court found that the Appellant’s relevant sales
compensation policy and global sales compensation handbook were ambiguous as to whether an
employee’s final incentive pay should be calculated based on full-year targets for all terminations or only
in the case of voluntary terminations. The High Court once again applied the contra proferentem rule
against the Appellant and held that full-year targets only applied in the case of voluntary terminations. As
the Respondent had been involuntarily terminated, the High Court held that her final incentive pay
should have been calculated based on pro-rated targets.

Holding of the Court of Appeal

On appeal, the Court of Appeal reversed the decision of the High Court, holding (1) that the NETS
contract did not constitute “new business” and (2) that an employee’s final incentive pay should be
calculated based on full-year targets for all terminations.

Contra proferentem
In coming to the conclusion that the contra proferentem rule was not applicable on the facts of the case,
the Court of Appeal took the opportunity to examine the application of the contra proferentem rule. The
Court of Appeal emphasized that difficulties in applying a contractual term to the specific facts cannot be
equated (or conflated) with ambiguity of the contractual term itself.

The Court of Appeal reiterated that in order for the contra proferentem rule to apply, it is a necessary
condition that there be an ambiguity in the contract which cannot be resolved (and not merely that it is
difficult to resolve) by interpreting the term in the context of the overall contract. The rule cannot apply to
create an ambiguity where one does not exist.

In the light of the Court of Appeal’s endorsement of the contextual approach to contractual interpretation,
the first task of the court is always to construe the document based on well-established principles of
contractual interpretation, including looking at the surrounding context as well as the purpose of the
agreement.

The Court of Appeal also cautioned that evidence of post-contractual conduct must be viewed with utmost
scrutiny as well as concern. Although the Singapore courts have not ruled out reliance on such conduct as
an aid in ascertaining relevant context, there has been no definitive view expressed by way of positive
endorsement on the same. The Court of Appeal observed that post-contractual conduct tends to lead the
court away from the objective exercise of interpretation and, on the contrary, tends to introduce a great
deal of subjectivity and uncertainty.

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Application to the facts

In respect of the NBM Claim, the Court of Appeal was of the view that on the facts of the case, the phrase
“new end-user customer” was clear. The contra proferentem rule was therefore inapplicable. Although
NETS had entered into a separate contract with the Appellant’s competitor with a view to leaving the
Appellant, it nevertheless continued in a contractual relationship with the Appellant. Since the
contractual relationship between NETS and the Appellant had never been terminated, NETS could not be
said to be a “new end-user customer”. More importantly, this contractual relationship continued to
persist at the time the NETS Contract was entered into. In the eloquent words of the Honourable Judge of
Appeal Andrew Phang delivering the judgment of the apex court:

“It is true that, in a colloquial sense, by virtue of its entry into a separate contract with IBM, NETS had
had one foot out of the door. However, it should also be noted that NETS simultaneously had the other
foot in the Appellant’s door. What is of first importance for the purposes of the present appeal is that
NETS never had both feet completely out of the Appellant’s door. It was only in this last-mentioned
situation that NETS could be said to have been “lost” as the Appellant’s customer…”

The Court of Appeal also considered that there were serious difficulties with the Respondent’s argument
that the Appellant’s delay in responding to the Respondent’s queries was evidence of an ambiguity. First,
there were sound reasons for the Appellant not responding immediately to the Respondent as at the time
of development and promulgation of the NBM, the concept of a “win back” was hypothetical and remote.
Faced with a situation that the Appellant had hitherto not considered, it needed time to consult internally
and make a decision. Secondly, the Appellant’s delay in responding was post-contractual conduct. The
Court of Appeal observed that while the courts are well-equipped at drawing the appropriate inferences
from conduct, this adds a layer of uncertainty to the exercise of contractual interpretation.

On the Pro-Rated Quota Claim, the Court of Appeal found that there was in fact no ambiguity in the
Appellant’s sales compensation policy. The text clearly stated that an employee’s final incentive payment
would be calculated with reference to full-year goals, with no mention of a distinction to be drawn
between voluntary and involuntary terminations.

Concluding Wisdom
This decision highlights the difficulties which lie in the sphere of interpretation of contracts; a point
which the Court of Appeal has also raised in other recent decisions. This authoritative landmark decision
has enunciated and endorsed ten important propositions of law relating to contra proferentem which will
brightly illuminate future cases:-

(a) the court should not be too ready or too early to have recourse to the contra proferentem rule;
(b) the contra proferentem rule is one of last resort;
(c) the contra proferentem rule cannot apply to create an ambiguity where one does not exist;
(d) difficulties of application of a contractual term cannot be equated (or conflated) with ambiguity;
(e) in order for the contra proferentem rule to apply, it is a necessary condition that there be
ambiguity which cannot be resolved and not merely difficult to resolve;
(f) the mere fact that a situation was not contemplated by the drafter does not mean that a term was
ambiguous or inapplicable (Were it otherwise, logically and common-sensically, every dispute
could, ipso facto, be said to involve ambiguity and hence attract the application of the contra
proferentem rule. This would turn the application of the rule on its head);
(g) however, it may be the case that after the court undertakes an objective inquiry as to the
meaning of the term in question, it nevertheless concludes that the term is unambiguous as to
whether it provides for an unforeseen event;
(h) the contra proferentem rule does not enable the court to adopt a strained meaning of the
contract;
(i) the role of the maxim is to enable the court to choose between alternative meanings of the
document or clause in question, being meanings which are fairly open;

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(j) it is an illegitimate use of the maxim to say two meanings of a particular contractual provision
are possible and the meaning unfavourable to the proferens should be chosen if one of the rival
meanings is an unrealistic or unlikely construction of the contract.

It is clear from this case that the canon of contra proferentem cannot be used as a magic bullet in
contractual interpretation. Everything depends on an objective interpretation of the term by the court.

Nonetheless, at the front end stage, parties should ensure that contractual terms are drafted as clearly
and unambiguously as possible to avoid any difficulty or uncertainty in their application. While it may be
impracticable to provide for every conceivable contingency in a contract, parties should, apply their
minds to various scenarios and their resultant outcomes to minimize the risk of ambiguity.

Parties wishing to consult on issues of contractual interpretation may contact our team below.

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Contacts
Gregory Vijayendran Lester Chua
Partner Senior Associate

D (65) 6232 0438 D (65) 6232 0561

F (65) 6428 2115 F (65) 6428 2135
gregory.vijayendran@rajahtann.com lester.chua@rajahtann.com

Pradeep Nair
Associate

D (65) 6232 0777

F (65) 6428 2274

pradeep.nair@rajahtann.com

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